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Mid-caps stocks, like WestRock Company (NYSE:WRK) with a market capitalization of US$9.9b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks.
Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts.
This article will examine WRK’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth.
Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis
into WRK here.

How does WRK’s operating cash flow stack up against its debt?

Over the past year, WRK has ramped up its debt from US$6.6b to US$11b
, which includes long-term debt.
With this
rise
in debt,
the current cash and short-term investment levels stands at US$261m
, ready to deploy into the business.
On top of this,
WRK has
generated
US$2.5b in operating cash flow
over the same time period,
resulting in
an operating cash to total debt ratio of 23%,
meaning that
WRK’s
operating cash is sufficient to cover its debt.
This ratio can also be interpreted as a measure of efficiency
as an alternative to return on assets.
In WRK’s case, it is able to generate 0.23x cash from its debt capital.

Can WRK meet its short-term obligations with the cash in hand?

At the current liabilities level of US$3.7b,
it appears that the company
has been able to meet these obligations given the level of current assets of US$5.2b, with a current ratio of 1.4x.
Generally, for Packaging companies, this is a reasonable ratio
since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:WRK Historical Debt February 14th 19

Does WRK face the risk of succumbing to its debt-load?

WRK is a relatively highly levered company with a debt-to-equity of 93%.
This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses.
We can check to see whether WRK is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In WRK’s, case, the ratio
of 5x suggests that interest is appropriately covered, which means that
lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

WRK’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow.
Since there is also no concerns around WRK’s liquidity needs, this may be its optimal capital structure for the time being.
Keep in mind I haven’t considered other factors such as how WRK has been performing in the past.
I recommend you
continue to research WestRock to get a
better picture
of the mid-cap by looking at:

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.

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